The winds of change are blowing for the marine fuels sector. The International Maritime Organization’s (IMO) binding regulations on marine sulphur fuel limits come into force on 1 January 2020 and have the potential to be highly disruptive.

The impact will not only be felt in the shipping industry but will make waves across the entire energy value chain – from refineries to producers to bulk seaborne trade; stretching as far as the airline industry.

0.5%

Maximum fuel oil sulphur limit from 2020 onwards

Higher fuel bills

Under the IMO’s regulations, from 2020 the current maximum fuel oil sulphur limit of 3.5% weight will be dramatically lowered to an effective weight of 0.5%. These tougher limits mark the biggest reduction in transport sector sulphur content enacted at one time.

The limits set by the IMO’s MARPOL Annex VI will force the shipping industry to switch to lower sulphur, but costlier, fuels such as marine gas oil (MGO) and very low sulphur fuel oil (VLSFO) to reduce shipping emissions.

In our base case forecast, we see the shift to cleaner fuel adding US$24 billion in fuel costs to the shipping industry in 2020. In a full compliance scenario, the added cost is as much as US$60bn.

Shipping companies face hard choices

We don't expect sufficient volumes of VLSFO to be available at current fuel oil price levels in 2020. Marine LNG is an alternative compliant fuel to assist the shift towards lower sulphur emissions in the longer term. However, with port infrastructure still developing, we expect LNG to increase market share only post the IMO’s deadline.

Opting to install scrubbers will allow a vessel to continue to burn HSFO rather than switching to higher-priced fuel options. Various constraints including access to finance and limited manufacturing capacity mean only a small percentage of the global shipping fleet will have scrubbers installed by 2020.

As the hard deadline of 1 January 2020 for IMO compliance approaches, shipping companies will face critical decisions. Will they select high-cost lower-sulphur fuels? Will they install costly sulphur dioxide scrubbers on older ships? Or will they invest in LNG powered ships?

Most shipowners will switch to pricier low-sulphur fuels. But if all ships did so in 2020, demand for them would double and the industry’s fuel bill would rise by $60bn, roughly the entire sum spent in 2016, say analysts at Wood Mackenzie, a research firm. It would also have a dramatic impact on aviation and road transport. Ships run on a heavy residue that remains after petrol, diesel and other lighter hydrocarbons are extracted from crude oil in refining.

Zachary Rogers, Research Analyst Refining and Oil Product Markets, quoted in The Economist

27 October 2018

Oil value chain highly volatile, refiners stand to benefit

There is likely to be ongoing uncertainty around the fuel choices shipping companies will make, which could lead to volatility for the oil supply chain. Demand for very low sulphur fuel oil will mean medium and heavy sweet crudes should be in strong demand, while heavier, sour crudes could become less attractive to refiners.

Overall, we expect a material impact on refining economics post IMO and refiners must ensure they have a robust strategy in place.

Step change increase for bulk transport costs

Fuel typically accounts for 50% of voyage costs and sectors that rely on ocean-going freight for transport – such as the coal industry, should brace for fuel costs to rise in the lead up to 2020 and beyond.

We believe coal exporters and importers can expect a 20% to 40% step change increase in coal route voyage rates on a US$/tonne basis in 2020, depending on the compliant fuel type used and assuming shippers opt to switch fuels for compliance.

With the international shipping industry responsible for the carriage of a substantial proportion of world trade, any major increases in transport costs for ocean-going freight will have an impact on the global economy.

Knock-on effect for airlines

Shipping companies’ changing fuel requirements could be highly disruptive for the pricing and availability of other fuels and the impact could be felt far beyond global waters. For example, a spike in diesel prices due to a demand surge from the shipping industry could drive refineries to cut output of jet fuel, with the potential to increase airline fuel bills and put pressure on their profitability.

Prepare for disruption from 2019

The IMO’s limits on sulphur content for bulker fuels are set to disrupt the global shipping supply chain. With the hard deadline of 1 January 2020 approaching, we could well see an impact from as early as the middle of 2019. To prepare for these changes, seek expert advice to understand how the market’s response to the shift towards cleaner fuels will affect your business.

IMO webinar recording

Our North American Refining & Oil Products team discuss:

How could the changing mix of fuel types consumed by the shipping sector disrupt wider markets?

As the IMO's legislation effective date approaches, will shippers encounter smooth sailing or rough seas as they make the transition to low-sulphur fuels?

Which product markets will fare better than others or will scrubbers emerge as the most popular choice?

To request access to this webinar recording please complete the form.

If you have any questions with regards to this webinar, please contact us.

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Summary

The forthcoming change in IMO regulations on the quality of marine bunker fuel impacts the mix of fuel types consumed by the shipping sector in 2020. This insight summarises our latest view on the impact of this fuel specification change, providing an update on the article published in April 2018. The insight provides our latest forecasts for bunker fuel prices and crude differentials consistent with our H1 2018 Brent price forecast and global refined product imbalances. We highlight recent developments in terms of scrubber and LNG investments and our latest assessment of the availability of VLSFO and middle distillate fuels. We also present further work in relation to crude slate evolution, refinery investments and upgrading capacity. The analysis also assesses regional fuel oil balances and potential markets for displaced fuel oil in regional power markets.

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